Service center revenue may rely on combination of size, strategies

Welcome to a new column, which will attempt to make sense of trends in the various metal sectors through an analysis of industry data and other numbers.

In this issue Im taking a look at service center revenues. This summer marks the third consecutive year that AMM has surveyed service centers and ranked them by annual revenue. Beyond the straightforward dollars reporting, what do the practices and subsequent fates of distributors tell us? Well, size and strategy appear to be a winning combination.

The average annual revenue per distributor in millions of dollars for the top 50 service centers each fiscal year (not necessarily calendar year) was:

Despite a slight trailing off during the 2012-13 fiscal year, revenues are still significantly higher today than they were in 2010-11. Revenue performance varies widely, however, depending on where a company falls on the list. The average service center revenue this year in millions of dollars by the five tiers of companies was:

The gap between the biggest companies and the rest opens up quickly at the top and then continues to drop substantially between each level. There are some other interesting trends that revenue reporting shows:

>>The ratio between tiers has become wider over time. In 2011, the first year of the survey, the average revenue of the top 10 companies was about 29 times the average of the bottom 10 firms. This year, that has opened up to 54 times as much.

>>The average of the bottom 10 distributors is below the revenue levels they reached two years ago ($68 million vs. $96 million), the only one of the five tiers to see such a decrease.

>>The top 10 companies are ahead of last year, increasing average revenue by about 2 percent. The averages of the other four tiers all fell this year.

>>Eight of the companies in the top 10 saw increases or held steady in each year of the survey. No other tier came close to that level of consistency.

>>The median revenue for all 50 companies was $400 million in 2010-11, $450 million in 2011-12 and $430 million in 2012-13.

All of this raises the question of what factors drive revenue at service centers. External factors, which tend to apply to service centers of all sizes, include changes in the U.S. gross domestic product, the price of steel products, steel output, imports and exports, and steel shipments.

For example, adding a new facility is a strategy employed widely and nearly evenly by the top 40 companies, at a rate of about 80 percent of distributors, but only by about 30 percent of the bottom 10. Upgrading an existing facility also is a strategy employed by about 80 percent of the top 40, while only 40 percent of the bottom 10 did so. So while such a maneuver may not guarantee much more revenue, skipping these measures does seem to put service centers at a disadvantage.

Then there is the question of diversification. Of the top 50 companies, only nine rely on aluminum for 15 percent or more of their revenue and only eight rely on similar levels of stainless steel. But as these charts show, one tier of companies dominates the strategy of using aluminum and stainless steel for at least 15 percent of their business:

Clearly, strong diversification--an approach practiced by the biggest companies--is contributing something substantial to the bottom line, as the bigger distributors recognize and are able to implement.

Ultimately, it may be as simple as the fact that when it comes to service centers, size really does matter. This chart shows the percentage changes in revenue from 2011-12 to 2012-13 among the top 50 distributors surveyed:

Not only were the top 10 distributors the only tier to increase revenues, but the percentage drops in the remaining four tiers follow an almost steady line downward. This suggests that when times get tough, a big company may be better able to leverage its advantages in the marketplace and use a variety of strategies to keep revenue coming in.